Netspar Brief 13: Shared Interests for Longer: On Solidarity and Sharing Longevity Risk
Slight fluctuations in the projections regarding life expectancy can have a big impact on pensions. This “longevity risk” is now shared through the funding ratio. That can be disadvantageous for older workers, in particular, since they are unable to compensate for fluctuations in pension income by, for instance, working longer. In the thirteenth Netspar Brief, Anja De Waegenaere and Michel Vellekoop analyze an alternative rule in which the degree of risk can vary per age cohort. This entails dividing participants into three groups, with the active members in a fund assuming the risk for the oldest members and younger retirees assuming only their own risk. The rule can prevent undesirable fluctuations for the very old, while limiting the effects for younger cohorts in many cases.
The Dutch Social and Economic Council (SER) is currently discussing the possibility of allowing workers to accrue their pension in so-called personal pension pots. That would mean that uniform risk sharing such as now is the norm would no longer be the only possibility. People could choose to distribute the longevity risk in such a way that the very old would not be affected. A critical element for introducing the rule with a distribution across three age groups would be that pension fund managers or social partners be given flexibility in setting the age limits. That is because the impact on the various cohorts depends on the age structure within a pension fund. Preserving the principle of solidarity is also a requisite: current active members must be able to trust that their risk will be assumed when their time comes.
Read the Brief (only in Dutch available) and the English summary.
- Het delen van langlevenrisico, Netspar Occasional paper, De Waegenaere, A., Janssen, P., Joseph, A., & Vellekoop, M.
- Intergenerationele risicodeling in collectieve en individuele pensioencontracten, Design Paper 42, 2015, Ed Westerhout, Jan Bonenkamp, Peter Broer
- De meerwaarde van risicodeling met toekomstige generaties nader bezien, 2016, Netspar werkgroep over welvaartswinst van risicodeling met toekomstige generaties.
April 12, 2018: Netspar Anniversary Meeting: Lang zullen we leven! (presentations)